Financial institutions analysis

What types of risks are financial institutions more directly exposed to?

Credit risk, market risk, interest rate risk, and liquidity risk

What are the three pillars of the Basel III framework?

• Minimum capital requirements

• Minimum liquidity requirements (e.g., LCR, NSFR)

• Stable funding requirements

What does CAMELS stand for?

Capital adequacy, Asset quality, Management, Earnings, Liquidity, Sensitivity to market risk.

What is asset quality concerned with?

Credit quality, loan loss provisions, and diversification of loan portfolio.

What factors are considered under management analysis?

Strategy execution, risk management, governance, and operational efficiency.

How are earnings assessed in CAMELS?

Through ROE, ROA, net interest margin (NIM), and sustainability of income.

What are limitations of the CAMELS framework

It relies on backward-looking data and qualitative judgments, and may miss off-balance-sheet risks.

Name additional factors beyond CAMELS that analysts should consider.

• Government support likelihood

• Business model and mission

• Corporate culture and governance

• Competitive landscape

• Off-balance-sheet items (e.g., derivatives, guarantees)

• Segment and geographical disclosures

• Currency exposure

• Risk management disclosures

How do P&C and L&H insurance differ in terms of policy characteristics?

• P&C: Short-term policies, more variable claims

• L&H: Long-term policies, more predictable claims

What are the key revenue sources for insurers?

Premiums and investment income (earned on the float).

What key areas should analysts examine for all insurers?

• Business profile

• Earnings characteristics

• Investment portfolio and returns

• Liquidity

• Capitalization

hat is the combined ratio in P&C insurance analysis?

Combined Ratio = (Loss Ratio + Expense Ratio)
It assesses underwriting profitability. A ratio < 100% implies underwriting profit.

Name key ratios used in analyzing banks.

• Tier 1 Capital Ratio

• CET1 Ratio

• ROA / ROE

• Net Interest Margin (NIM)

• Cost-to-Income Ratio

• Loan-to-Deposit Ratio

• Non-Performing Loans (NPL) to Total Loans

• Provision Coverage Ratio

• LCR and NSFR

Name key ratios used in analyzing insurance companies.

• Combined Ratio (P&C)

• Loss Ratio

• Expense Ratio

• Investment Yield

• Solvency Ratio

• Return on Equity / Assets

Non-Performing Loans (NPL) Ratio

Non-Performing Loans / Total Loans

Loan Loss Provisions to NPLs

Loan Loss Provisions / Non-Performing Loans

Loan Loss Reserves to Total Loans

Loan Loss Reserves / Gross Loans

Loan-to-Deposit Ratio

Total Loans / Total Customer Deposits

Liquidity Coverage Ratio (LCR)

High-Quality Liquid Assets / Total Net Cash Outflows over 30 days

Net Stable Funding Ratio (NSFR)

Available Stable Funding / Required Stable Funding

Expense Ratio

Underwriting expense / Net premium writen

Loss ratio

Net loss / premium earned